DeFi, short for decentralised finance, refers to financial services — trading, lending, borrowing, earning yield — built from smart contracts on a public blockchain, rather than run by a bank, broker, or other centralised institution. In principle, anyone with a wallet and an internet connection can access them directly, without opening an account or asking permission.
The core building block is the smart contract: code deployed on a blockchain that runs automatically and exactly as written. A decentralised exchange, for example, uses smart contracts to let people trade directly from their own wallets, often pricing trades against a shared liquidity pool rather than matching individual buyers and sellers the way a traditional exchange does. Lending protocols work similarly — smart contracts hold collateral and manage loans according to fixed, transparent rules.
It's genuinely useful technology, and it removes some traditional middlemen. But removing a middleman doesn't remove risk — it just changes its shape. DeFi has its own specific failure modes: a bug in a smart contract's code can be exploited exactly as reliably as its intended logic executes; there's no customer support line or chargeback if something goes wrong; and products can be far more complex, and far more leveraged, than they first appear.
A few DeFi-specific terms are worth knowing before you use any of it. Impermanent loss is the risk of providing liquidity to a pool and ending up with less value than if you'd simply held the assets separately. Liquidation is what happens when a borrowed position's collateral falls below a required threshold and gets automatically sold off. And a rug pull is when a project's creators drain the funds and disappear — a risk that's higher in DeFi precisely because so little gatekeeping exists.
None of this makes DeFi something to avoid outright — it makes it something to understand before you use it. Start small, read what you're actually signing before you approve a transaction, and treat any "guaranteed yield" claim with real scepticism.